A corporate Bermuda triangle

May 21, 2002

By Barbara W. Carlson

BRANFORD, CONN.

There's a good chance that the screwdriver or steel tape measure in your house was made by Stanley Works.

Stanley has been the toolmaker heart of New Britain, Conn., and arguably of the country, since 1843, when Frederick T. Stanley began his hardware factory. For years, Stanley Works was a paternalistic hometown company, where whole families worked for years.

But earlier this month, at the annual stockholders meeting, Stanley's CEO, John M. Trani, raised the flag of Bermuda (figuratively) in a plan to join the parade of companies reincorporating overseas to avoid US taxes on income generated overseas. (The flag-raising was halted the next day in the face of legal action.) When Mr. Trani declared the meeting finished, a man in a business suit stood up and shouted, "I hope you fall flat on your face."

The capacity crowd, many of them retired Stanley employees, bristled with anger. Their reasons were fiscal, patriotic, sentimental: The reincorporation would require shareholders to exchange their current shares for "Stanley Bermuda" shares, making them liable for capital gains, which could be onerous, since Stanley shareholders typically hold their stock a long time. The company has confirmed that shareholders will be paying the government about $150 million in capital gains taxes.

The patriotism issue was strong. Retirees distributed American flags at the entrance to the Stanley corporate park. Connecticut Rep. James H. Maloney (D) called the proposal a betrayal of New Britain, of Connecticut, and of America, the worst betrayal since Benedict Arnold.

For some, the intangibles hurt. William Sanders, a burly retired firefighter and locksmith who did contract work for Stanley, said before the meeting, "It's hard for me. It's a business, and they should make money, but I see no reason for leaving the country." Mr. Sanders said he owns more than 6,000 shares, and all his eight children and 10 grandchildren own shares. "There's no loyalty to New Britain or the people here," he said.

A woman named Lorraine told me her parents worked all their lives at Stanley Works and left Stanley stock to her and her siblings, and she now has 500 shares. She hasn't wanted to sell her stock for "psychological" reasons, she said. But now she feels "in a pickle," unsure of the tax ramifications, confused about what to do.

I could understand Lorraine, because I, too, hold inherited stock  originally bought by my grandfather, who owned a carriage-making shop near the turn of the 20th century.

In brief, here's what happened on May 9: Shareholders voted for the Bermuda plan by the slimmest margin, just above the required two-thirds of eligible votes. But there was a glitch. Employees in the 401(k) retirement plan had been incorrectly informed that not voting would mean "no" votes. Oops, mistake, they were told in another letter sent out a week before the meeting.

Because state Attorney General Richard Blumenthal found the meeting "rife with voting irregularities," and because Bermuda laws could limit shareholders' legal rights, he filed suit in New Britain Superior Court. But before an injunction was issued, Trani agreed  the day after the meeting  to a revote. No date has been set. The suit is still pending.

Bills have been introduced in both the US Senate and the House to prevent corporations from avoiding US income tax by reincorporating in a foreign country. In discussing the Senate bill, Sen. Charles Grassley (R) of Iowa, said the "expatriations aren't illegal. But they are immoral."

It's a thorny subject. Trani repeatedly talked of needing a "level playing field" to compete globally. He said the reincorporation would save Stanley $30 million a year in US taxes, money that would be reinvested to "grow the company." He said Stanley jobs had already gone overseas, where labor costs are low. (Close to 50 percent of employees are outside the US.)

When a shareholder said Stanley Works "was known for years as a company with a heart," Trani responded, "Our job is not to be popular, not to be a social institution that goes down the drain." The company, he reiterated, "has to be competitive or cease to exist."

The options for the US and companies pondering overseas mail drops should be weighed. Congress should give the pending bills priority. Lobbyists, big corporate givers, and the congressional recipients of their largess  and the administration  should be made aware of what's at stake here, what Congressman Maloney calls a "potential hemorrhaging of revenues to the government."

Stanley had net sales of $2.6 billion last year, and as Trani says, reincorporation would save the company $30 million a year. If corporations want to seriously cut costs, they might cut executive salaries. Trani's salary, bonus, and "other compensation" in 2001 was $3.6 million. The aggregate salaries, bonuses, and "other compensation" of four other executive officers totaled $2 million. The pay of these five executives adds up to about 19 percent of the $30 million saved, and stock options aren't even being taken into account.

Couldn't these executives struggle by on just a little less? It's time corporate directors stopped assuming that their top executives will wind up in the street with tin cups if their huge salaries stop rolling in. And isn't there some sort of moral responsibility in corporate life?

Directors and executives supposedly represent the shareholders. Yet with the Bermuda plan, longtime shareholders would be hit with huge capital gains. Where's their advantage? And when taxes leave the country and the state, somebody has to pay. Who? We know.

 Barbara W. Carlson is a freelance journalist.

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